Business suppliers and customers are exploring different ways to manage their relationships.60 Loyalty is driven in part by supply chain management, early supplier involvement, and purchasing alliances.61
Business-to-business marketers are avoiding “spray and pray” approaches to attracting and retaining customers in favor of honing in on their targets and developing one-to-one marketing approaches.62 Nearly 80 percent of the Fortune 500 use SAP software, but the software giant begin to lose market share and revenue when, as one cofounder observed, “We had lost the trust in relationships with our customers, and employees did not believe in management.” Embracing innovation with new cloud-based services was a big part of the company’s turnaround strategy; the other was focusing on improving customer relationships. A controversial price hike introduced during the financial crisis was reversed, and new co-CEOs vowed to listen more closely to customer concerns.63
1. THE BENEFITS OF VERTICAL COORDINATION
Much research has advocated greater vertical coordination between buying partners and sellers so they can transcend merely transacting and instead create more value for both parties.64 Building trust is one prerequisite to enjoying healthy long-term relationships. “Marketing Insight: Establishing Corporate Trust, Credibility, and Reputation” identifies some key dimensions of such trust. Knowledge that is specific and relevant to a relationship partner is also an important factor in the strength of interfirm ties.65
A number of forces influence the development of a relationship between business partners. Four relevant ones are availability of alternatives, importance of supply, complexity of supply, and supply market dynamism. Based on these we can classify buyer-supplier relationships into eight categories:66
- Basic buying and selling—These are simple, routine exchanges with moderate levels of cooperation and information exchange.
- Bare bones—These relationships require more adaptation by the seller and less cooperation and information exchange.
- Contractual transaction—These exchanges are defined by formal contract and generally have low levels of trust, cooperation, and interaction.
- Customer supply—In this traditional supply situation, competition rather than cooperation is the dominant form of governance.
- Cooperative systems—The partners in cooperative systems are united in operational ways, but neither demonstrates structural commitment through legal means or adaptation.
- Collaborative—In collaborative exchanges, much trust and commitment lead to true partnership.
- Mutually adaptive—Buyers and sellers make many relationship-specific adaptations, but without necessarily achieving strong trust or cooperation.
- Customer is king—In this close, cooperative relationship, the seller adapts to meet the customer’s needs without expecting much adaptation or change in exchange.
Over time, however, relationship roles may shift or be activated under different circumstances.67 Some needs can be satisfied with fairly basic supplier performance. Buyers then neither want nor require a close relationship with a supplier. Likewise, some suppliers may not find it worth their while to invest in customers with limited growth potential.
One study found the closest relationships between customers and suppliers arose when supply was important to the customer and there were procurement obstacles, such as complex purchase requirements and few alternate suppliers.68 Another study suggested that greater vertical coordination between buyer and seller through information exchange and planning is usually necessary only when high environmental uncertainty exists and specific investments (described next) are modest.69
2. RISKS AND OPPORTUNISM IN BUSINESS RELATIONSHIPS
Researchers have noted that establishing a customer-supplier relationship creates tension between safeguarding (ensuring predictable solutions) and adapting (allowing for flexibility for unanticipated events). Vertical coordination can facilitate stronger customer-seller ties but may also increase the risk to the customer’s and supplier’s specific investments.70
Specific investments are those expenditures tailored to a particular company and value chain partner (investments in company-specific training, equipment, and operating procedures or systems).71 They help firms grow profits and achieve their positioning.72 Xerox worked closely with its suppliers to develop customized processes and components that reduced its copier manufacturing costs by 30 percent to 40 percent. In return, suppliers received sales and volume guarantees, an enhanced understanding of their customer’s needs, and a strong position with Xerox for future sales.73
Specific investments, however, also entail considerable risk to both customer and supplier. Transaction theory from economics maintains that because these investments are partially sunk, they lock firms into a particular relationship. Sensitive cost and process information may need to be exchanged. A buyer may be vulnerable to holdup because of switching costs; a supplier may be more vulnerable because it has dedicated assets and/or technology/ knowledge at stake. In terms of the latter risk, consider the following example.74
An automobile component manufacturer wins a contract to supply an under-hood component to an original equipment manufacturer (OEM). A one-year, sole-source contract safeguards the supplier’s OEM-specific investments in a dedicated production line. However, the supplier may also be obliged to work (noncontractually) as a partner with the OEM’s internal engineering staff, using linked computing facilities to exchange detailed engineering information and coordinate frequent design and manufacturing changes over the term of the contract. These interactions could reduce costs and/or increase quality by improving the firm’s responsiveness to marketplace changes. But they could also magnify the threat to the supplier’s intellectual property.
When buyers cannot easily monitor supplier performance, the supplier might shirk or cheat and not deliver the expected value. Opportunism is “some form of cheating or undersupply relative to an implicit or explicit contract.”75 When it was discovered in 2007 that a supplier to a supplier to a supplier to a supplier of Mattel chose to use lead-based ingredients outside Mattel’s specification, the toy-makers reputation took a significant PR hit.
A more passive form of opportunism might be a refusal or unwillingness to adapt to changing circumstances or just negligance in satisfying contractual obligations. When a peanut-processing company, Peanut Corporation of America, with only $25 million in sales was found to have a contaminated product, a $1 billion recall resulted because the ingredient was found in 2,000 other products.76
Opportunism is a concern because firms must devote resources to control and monitoring that they could otherwise allocate to more productive purposes. Contracts may become inadequate to govern supplier transactions when supplier opportunism becomes difficult to detect, when firms make specific investments in assets they cannot use elsewhere, and when contingencies are harder to anticipate. Customers and suppliers are more likely to form a joint venture (instead of signing a simple contract) when the supplier’s degree of asset specificity is high, monitoring the supplier’s behavior is difficult, and the supplier has a poor reputation.77 When a supplier has a good reputation, it is more likely to avoid opportunism to protect this valuable intangible asset.
The presence of a significant future time horizon and/or strong solidarity norms typically causes customers and suppliers to strive for joint benefits. Their specific investments shift from expropriation (increased opportunism on the receiver’s part) to bonding (reduced opportunism).78
3. MARKETING INSIGHT Establishing Corporate Trust, Credibility, and Reputation
Corporate credibility is the extent to which customers believe a firm can design and deliver products and services that satisfy their needs and wants. It reflects the supplier’s reputation in the marketplace and is the foundation of a strong relationship.
Corporate credibility depends on three factors:
- Corporate expertise, the extent to which a company is seen as able to make and sell products or conduct services.
- Corporate trustworthiness, the extent to which a company is seen as motivated to be honest, dependable, and sensitive to customer needs.
- Corporate likability, the extent to which a company is seen as likable, attractive, prestigious, and dynamic.
In other words, a credible firm is good at what it does; it keeps its customers’ best interests in mind and is enjoyable to work with.
Trust is a firm’s willingness to rely on a business partner. It depends on a number of interpersonal and interorganizational factors, such as the firm’s perceived competence, integrity, honesty, and benevolence. Personal interactions with employees of the firm, opinions about the company as a whole, and perceptions of trust will evolve with experience. A firm is more likely to be seen as trustworthy when it:
- Provides full, honest information
- Provides employee incentives aligned to meet customer needs
- Partners with customers to help them learn and help themselves
- Offers valid comparisons with competitive products
Building trust can be especially tricky in online settings, and firms often impose more stringent requirements on their online business partners than on others. Business buyers worry that they won’t get products of the right quality delivered to the right place at the right time. Sellers worry about getting paid on time—or at all—and debate how much credit they should extend. Some firms, such as transportation and supply chain management company Ryder System, use automated credit-checking applications and online trust services to assess the creditworthiness of trading partners.
Sources: Kevin Lane Keller and David A. Aaker, “Corporate-Level Marketing: The Impact of Credibility on a Company’s Brand Extensions,” Corporate Reputation Review 1 (August 1998), pp. 356-78; Robert M. Morgan and Shelby D. Hunt, “The Commitment-Trust Theory of Relationship Marketing,” Journal of Marketing 58, no. 3 (July 1994), pp. 20-38; Christine Moorman, Rohit Deshpande, and Gerald Zaltman, “Factors Affecting Trust in Market Research Relationships,” Journal of Marketing 57 (January 1993), pp. 81-101; Glen Urban, “Where Are You Positioned on the Trust Dimensions?,” Don’t Just Relate-Advocate: A Blueprint for Profit in the Era of Customer Power (Upper Saddle River, NJ: Pearson Education/Wharton School Publishers, 2005).
4. Institutional and Government Markets
Our discussion has concentrated largely on the buying behavior of profit-seeking companies. Much of what we have said also applies to the buying practices of institutional and government organizations. However, we want to highlight certain special features of these markets.
The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles. For example, hospitals must decide what quality of food to buy for patients. The buying objective here is not profit because the food is provided as part of the total service package; nor is cost minimization the sole objective because poor food will cause patients to complain and hurt the hospital’s reputation. The hospital purchasing agent must search for institutional-food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low. In fact, many food vendors set up a separate sales division to cater to institutional buyers’ special needs and characteristics. Heinz produces, packages, and prices its ketchup differently to meet the requirements of hospitals, colleges, and prisons. ARAMARK, which provides food services for stadiums, arenas, campuses, businesses, and schools, also has a competitive advantage in providing food for the nation’s prisons, a direct result of refining its purchasing practices and supply chain management.79
ARAMARK Where ARAMARK once merely selected products from lists provided by potential suppliers, it now collaborates with suppliers to develop products customized to meet the needs of individual segments. In the corrections segment, quality has historically been sacrificed to meet food cost limits that operators outside the market would find impossible to work with. “When you go after business in the corrections field, you are making bids that are measured in hundredths of a cent,” says John Zillmer, president of ARAMARK’s Food & Support Services, “so any edge we can gain on the purchasing side is extremely valuable.” ARAMARK sourced a series of protein products with unique partners at price points it never could have imagined before. These partners were unique because they understood the chemistry of proteins and knew how to lower the price while still creating a product acceptable to ARAMARK’s customers, allowing the company to drive down costs. Then ARAMARK replicated this process with 163 different items formulated exclusively for corrections. Rather than reducing food costs by 1 cent or so a meal as usual, ARAMARK took 5 to 9 cents off—while maintaining or even improving quality.
In most countries, government organizations are a major buyer of goods and services. They typically require suppliers to submit bids and often award the contract to the lowest bidder, sometimes making allowance for superior quality or a reputation for completing contracts on time. Governments will also buy on a negotiated-contract basis, primarily in complex projects with major R&D costs and risks and those where there is little competition.
A major complaint of multinationals operating in Europe is that each country shows favoritism toward its nationals despite superior offers from foreign firms. Although such practices are fairly entrenched, the European Union is attempting to remove this bias. Another challenge is the volatility of spending due to economic swings and cycles. When state governments suddenly cut back their spending, a firm like Cisco, which makes 22 percent of its sales to the public sector, is likely to feel the effects.80 When the U.S. government announced a long-term cutback of hundreds of billions of dollars in defense spending in 2011—with more cuts anticipated—many defense contractors prepared to take signficant hits.81
Because their spending decisions are subject to public review, government organizations require considerable paperwork from suppliers, who often complain about bureaucracy, regulations, decision-making delays, and frequent shifts in procurement staff. But the fact remains that the U.S. government now spends more than $500 billion a year— or roughly 14 percent of the federal budget—on private-sector contractors, making it the largest and potentially the most attractive customer in the world.82 Motorola Solutions, created when Motorola was split into two companies, sells wireless communications equipment to public-safety agencies around the world that need state-of-the-art communications networks for police cars in a multibillion-dollar government market.83
Not only the dollar figure is large; so is the number of individual buys. According to the General Services Administration Procurement Data Center, more than 20 million individual contract actions are processed every year. Although most items purchased cost between $2,500 and $25,000, the government also makes purchases in the billions, many in technology.
Government decision makers often think vendors have not done their homework. Different types of agencies— defense, civilian, intelligence—have different needs, priorities, purchasing styles, and time frames. In addition, vendors often do not pay enough attention to cost justification, a major activity for government procurement professionals. Companies hoping to be government contractors need to help government agencies see the bottom-line impact of products. Demonstrating useful experience and successful past performance through case studies, especially with other government organizations, can be influential.84
Just as companies provide government agencies with guidelines about how best to purchase and use their products, governments provide would-be suppliers with detailed guidelines describing how to sell to the government. Failure to follow the guidelines or to fill out forms and contracts correctly can create a legal nightmare.85
Fortunately for businesses of all sizes, the federal government has been trying to simplify the contracting procedure and make bidding more attractive. Reforms place more emphasis on buying off-the-shelf items instead of customizing, communicating with vendors online to eliminate paperwork, and debriefing losing vendors to improve their chances of winning the next time around.86 More purchasing is being done online via Web-based forms, digital signatures, and electronic procurement cards (P-cards).
Several federal agencies that act as purchasing agents for the rest of the government have launched Web-based catalogs that allow authorized defense and civilian agencies to buy everything from medical and office supplies to clothing online. The General Services Administration, for example, not only sells stocked merchandise through its Web site but also creates direct links between buyers and contract suppliers. A good starting point for any work with the U.S. government is to make sure the company is in the Central Contractor Registration (CCR) database (www.ccr.gov), which collects, validates, stores, and disseminates data in support of agency acquisitions.87
Still, many companies that sell to the government have not used a marketing orientation, though some have established separate government marketing departments. Gateway, Rockwell, Kodak, and Goodyear anticipate government needs and projects, participate in the product specification phase, gather competitive intelligence, prepare bids carefully, and produce strong communications to describe and enhance their companies’ reputations.
Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.
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